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Grocery News- A&P; Supervalu; Winn-Dixie
Wednesday, July 28, 2010


Great Atlantic May Be Illiquid in Near Term, S&P Says
Great Atlantic & Pacific Tea Co. “may be illiquid at some point in the near term,” Standard & Poor’s said yesterday while issuing a second downgrade in five weeks. The corporate rating is now CCC, down another notch. The second-lien notes are likewise CCC, with a prediction that holders won’t recover more than 50 percent after default. Unsecured debt now has a CC rating couple with a projection that the recovery in default won’t exceed 10 percent.
S&P was prompted to downgrade again by the $62.6 million operating loss in the quarter ended June 19 on sales of $2.57 billion. The net loss in the period was $122.6 million. Comparable-store sales declined 7.2 percent in the quarter.
Although food retailers generally have been under pressure, S&P said that the performance of A&P “has generally been worse than industry averages.” Cash from operations isn’t covering interest expenses and capital expenditures. A&P has its third chief executive officer in 12 months. A&P’s hurdles include $165 million in convertible debt that matures in 2011, S&P said. In 2012, maturities are over $900 million including bonds, a term loan and revolving credit, according to data compiled by Bloomberg. In the June downgrade, S&P’s stated concerns included multiemployer pension debt, “limited free cash flow generation, and geographic concentration.”
A&P reported a $876 million net loss and an $802 million loss from continuing operations for the fiscal year ended in February, on sales of $8.81 billion. The loss from operations in the year was $600.6 million. The unaudited balance sheet was upside down on June 19, with total assets of $2.68 billion and total liabilities of $3.20 billion. Montvale, New Jersey-based A&P had 429 stores in June, mostly in New York, New Jersey and Pennsylvania.
S&P Downgrades A&P To 'CCC'
     -- Operating performance at U.S. food retailer A&P was weaker than expected in the first quarter.
     -- We expect weak trends to continue and the company to be significantly cash flow negative.
     -- We are lowering our corporate credit rating on the company to 'CCC' from 'CCC+'.
     -- The negative outlook reflects our projection that the company may be illiquid at some point in the near term as a result of weak performance and its considerable near-term maturities.
Rating Action
On July 27, 2010, Standard & Poor's Ratings Services lowered its corporate credit rating on Montvale, N.J.-based Great Atlantic & Pacific Tea Co. Inc. (A&P) to 'CCC' from 'CCC+'. The rating outlook is negative. At the same time, we took the following rating actions:
     -- Lowered the rating on the company's second-lien senior notes to 'CCC' from 'CCC+' and maintained the recovery rating of '4' on the notes, which indicates our expectation of average (30%-50%) recovery of principle in the event of default.
     -- Lowered the rating on the company's unsecured debt to 'CC' from 'CCC-' and maintained the '6' recovery rating, which indicates our expectation of negligible (0%-10%) recovery of principle in the event of default.
The rating on A&P reflects its weak liquidity position, which is a result of the company's poor performance, high interest expense, and considerable near-term maturities. In our view, A&P has a vulnerable business profile, which is evident by the substantial profit declines in the past three quarters that is a result of the weak economic conditions intensifying the competitive food retailing environment. Sales are down because of weak customer traffic, and margins have been pressured since the company invested in price and deleveraged fixed costs. While many supermarkets have experienced profit pressure over the past year, performance at A&P has generally been worse than industry averages. We expect another considerable decline in EBITDA in the company's second quarter. After that point, operating trends may stabilize somewhat, but we do not expect material improvements either.
At the end of the second quarter, we expect last-12-month (LTM) EBITDA to be in a range of $110 million-$130 million, and currently expect that it could stay around that level for the rest of 2010. However, LTM EBITDA at that point would be well below cash interest expense and capital spending levels. Currently, we expect that the company's cash interest expense to be approximately $170 million and capital spending to be slightly below current LTM levels of $79.4 million. As a result, in 2010 we expect cash usage could be over $110 million.
This performance scenario would leave the company very highly leveraged at the end of 2010 and we estimate operating lease-adjusted debt to EBITDA would be between 14x and 15x. We believe that this level of leverage is unsustainable.
The company also announced that it hired Sam Martin, most recently COO of OfficeMax Inc., to be the company's new CEO. We note that Mr. Martin is the company's third CEO within 12 months. Currently, given the competitive nature of the industry and the company's relative underperformance, we are not factoring material improvement into operating performance. We also feel that the company may look to ultimately restructure its liabilities absent a very significant improvement in profitability.
Supervalu CFO Knous to leave this month
Supervalu CFO Pamela Knous to leave this month, company hires firm to find replacement
Supervalu Inc. says its chief financial officer, Pamela K. Knous, is leaving the grocery company to pursue other interests. The company said in a news release Tuesday that Knous, 56, will be available to help with the transition after stepping down as CFO on Friday. The company has hired a search firm to find a replacement. It expects to have the slot filled by the time it reports second quarter results in October. Sherry M. Smith, currently senior vice president of finance will be the interim replacement. Knous worked for the company for almost 13 years. Earlier Tuesday, Supervalu said its first-quarter net income fell 40 percent as rising competition cut into sales.
Grocery-Chain Operator Supervalu Turns Gloomy on Broad Economy
Supervalu Inc. reported a 41% decline in first-quarter earnings, providing yet another sign of slumping profits in the grocery industry.  The supermarket company—which operates the Jewel, Shaw's, Albertson's and Save-A-Lot chains— also slashed its annual-revenue guidance.  Chief Executive Craig Herkert believes the company's slumping sales have stabilized but is "not optimistic" the broader economy will improve any time soon. Coupon and food-stamp usage are still rising, he adds. "We continue to see a very, very challenged economic environment," Mr. Herkert told investors during an earnings call Tuesday. For its fiscal first quarter ended June 19, Supervalu reported earnings of $67 million, or 31 cents a share, down from $113 million, or 53 cents a share, during the year-earlier quarter. Excluding tax and labor-dispute charges, earnings were 43 cents. Same-store sales, a key indicator of retailer health, declined 6.5%, excluding the impacts from a labor dispute. Supervalu's soft sales mirror the industry's struggle. Safeway Inc., operator of Dominick's and Von's, reported its profits sank more than 40%, a byproduct of food deflation. Northeast grocer Great Atlantic & Pacific Tea Co. replaced its chief executive last week, after it reported a quarterly loss of $122.6 million.  During the recession, Supervalu reversed its initial strategy of slashing prices across thousands of items. The company, based in Eden Prairie, Minn., has since become more vigilant in what products it promotes, slimmed down product selection and reduced its normal shelf prices. That strategy has led to improving gross profit margins but sales—and market share—have slid. Same-store sales have fallen about 10% on a two-year basis. During the earnings call, several analysts pushed Mr. Herkert on why he felt the declining sales would stabilize and improve the rest of the year.  "We are being as aggressive as I think we should be [with pricing]," says Mr. Herkert, a former Wal-Mart Stores Inc. executive hired a little more than a year ago. He repeatedly pinned the sales turnaround on the talents of his new management team. Supervalu forecasts a 5% drop in same-store sales for the rest of the fiscal year.
For the quarter, Supervalu's revenue fell to $11.5 billion from $12.7 billion. The grocer cut its yearly revenue target by $1 billion to $38 billion. The company also announced its chief financial officer, Pamela K. Knous, would be leaving the company at the end of the month. Supervalu has retained a search firm and expects to name a replacement by its next earnings call in October.
Winn-Dixie plans layoffs, store closures
Winn-Dixie Stores Inc. is closing 30 under performing grocery stores, eliminating 120 corporate and field positions and consolidating its four operating regions into three, according to an announcement from the company. The Jacksonville-based food retailer did not immediately provide the total number of layoffs expected, but did confirm that there are on average 65 employees per store, which totals 1,950 over 30 stores. Those employees will be given the chance to apply for other jobs in the company.
“We continue to operate in a particularly difficult economic and retail environment in the Southeast. To respond to these business and economic conditions, we have thoroughly reviewed our retail operations and support structure and have decided to exit certain retail locations and reduce our corporate and field support staffs,” Winn-Dixie Chairman, CEO and President Peter Lynch said in a prepared statement. “The actions we are taking today will enable us to lower our cost structure, improve efficiency, and build the right foundation for our business now and in the future.”
Laid off employees not placed in other positions will be provided severance pay. The company is expecting to pay out $5 million in severance pay, according to the news release. The store closures and job eliminations will take effect in the grocer’s second quarter fiscal 2011, which begins Sept. 23.
The company declined to provide more details about where the closing stores are located beyond confirming one store to be in Jacksonville, but said the full list will be released July 29. The 30 closing stores have not been through the company’s ongoing remodel program that started after emerging from bankruptcy several years ago. As a result of the layoffs, job eliminations and consolidations, the company expects to achieve annualized savings in the range of $12 to $17 million.
Winn-Dixie expects a $35 to $50 million lease related charge in its fiscal first quarter that ends Sept. 22 relating to the store closings. Winn-Dixie operates 514 stores in five Southeastern states.

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